PetroCaribe casts a shadow of debt

No one should be in any doubt about the critical importance of Venezuela's PetroCaribe programme.

If it were not for the energy lifeline that it has provided to every Caribbean nation other than Trinidad and Barbados, much of the region would by now be in economic free fall.

Under the arrangement, Cari-forum nations have received in total, oil on preferential terms at the rate of between 120,000 and 140,000 barrels per day over the past three years.

The largest share of this has been allocated to Jamaica and the Dominican Republic while Cuba, separately, has received around 100,000 barrels per day under a more complex arrangement with Caracas.

The benefit of the PetroCaribe scheme is that member countries are allowed to retain part of their payment in the form of a very low interest loan repaid over a 25-year period.

This has enabled regional governments to use the programme for balance-of-payment purposes and budgetary support, while others have delayed due payments for long periods.

Less positively, the programme has increased the region's long-term indebtedness.

For example, the Dominican Republic's PetroCaribe-related debt now totals over US$1.23 billion, up from US$448.8 million in 2006, and Caracas is projecting that more than one-third of the Caribbean's total external debt will be owed to Venezuela by 2015.

political leverage

Despite criticism from those outside the Caribbean who do not like the implied political leverage the programme gives to Caracas, no other nation at this time has the political will to provide this level of support to Caribbean states. So much so that the US in particular is now faced with the paradox of needing Caracas' continuing commitment to maintaining PetroCaribe's programmes in the region if it is to have any guarantee of economic and social stability in the region.

Having said this, there is a need for much greater realism about the arrangement.

Nations within the region and beyond ought to be asking themselves serious questions about what happens if Venezuela finds itself having to increase prices, reduce supply, or if it were to need to vary the arrangement in order to address its own economic problems.

Venezuela's oil sector accounts for more than three-quarters of total Venezuelan export revenue, about half of total government revenues, and around one-third its gross domestic product (GDP).

Despite oil prices remaining firm, President Chávez is now struggling to address a deepening power-supply crisis, the devaluation of the Bolívar, rising inflation, shortages in the shops, and loud political opposition to his centralising reforms.

This is all happening as Venezuela's oil production stagnates and domestic demand for oil and gas increases as power blackouts cause sales of generators to surge, government to spend huge sums on mobile generating plants and to develop plans to move from hydro power to oil-fired thermoelectric power plants.

The consequence is a rapid increase in domestic demand for fuel oil and diesel and a fall in oil exports.

cut in exports inevitable

According to newspaper reports, the nation's Energy Minister, Rafael Ramirez, has said that a reduction in the export of oil pro-ducts "may indeed occur in 2010 because our priority is the domestic market". However, officials of the state oil company, PDVSA, say privately that a cut in exports is inevitable.

Other reports note that PDVSA officials are suggesting that it may be the Caribbean that bears the brunt of any cuts.

They say that oil exports to Cuba will not be cut, that every effort will be made to maintain or increase exports to the US and China, and by elimination, some exports of fuel oil and gasoil to the Caribbean may be at risk.

If this happens, it is uncertain how cuts will be applied.

The one country least likely to
be affected will be Cuba, given the symbiotic relationship that
exists between both nations. Haiti, too, is unlikely to suffer. Venezuela has
pledged to provide for the fuel needs of the Haitian people without cost and has
allocated $120 million to aid the reconstruction of industry, agriculture and
social services. President Chávez has also announced that Venezuela will forgive
Haiti's debt, estimated by the International Monetary Fund (IMF) to be US$295
million.

However, the outcome may be less clear for those countries in the
region that Venezuela has been critical of politically.

For example, after a military coup ousted Honduras' President
Manuel Zelaya, in 2008 Venezuela halted the delivery of oil there.

The Dominican Republic may also have been penalised over the
manner in which it rapidly recognised Mr Zelaya's successor, with it is said,
Caracas pulling out of a deal to purchase a 49 per cent stake in a Dominican
refinery.

Similarly, PDVSA is evaluating whether or not to cease operations
at the Isla refinery in Curaçao. According to the Venezuelan energy minister,
PDVSA "cannot make commercial calculations that are not linked to the national
interest".

"Our oil industry is not divorced from the internal policy of our
government," he told reporters, after President Chávez accused the US military
of using a base on Curaçao to launch spy flights into Venezuelan airspace.

How the Venezuelan govern-ment will respond to a tightening in
demand for its oil is far from clear, but there is some precedent.

In the summer of 2009, Caracas announced that it planned to change
the payment terms for oil and oil products, with PetroCaribe members required to
pay up to 80 per cent of their bills, rather than 40 per cent within 90 days of
receiving a delivery.

no change in prices

In the end, it seems that no change was made as oil prices
increased.

Irrespective, in a Caribbean region in which many nations are
engaged in IMF programmes, are reducing public expenditure and seeing
significant falls in tax and tourism revenues, any significant change in the
PetroCaribe arrangement or pricing could come as a shock.

This is not to be alarmist but to try to encourage greater realism
about the sustainability of the hugely beneficial programmes in the Caribbean in
their present form.

Much of the region's economic stability depends on the
continuation of the PetroCaribe arrangement and its pricing structure: factors
which should give pause for thought not only in the region, but also among those
in Washington and Europe not well disposed to Venezuela's regional role.